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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Stock transactions for corporate expansion

On December 1 of the current year, the following accounts and their balances appear in the ledger of Latte Corp., a coffee processor:

Preferred 2% Stock, $50 par (250,000 shares authorized. 80,000 shares issued) $ 4,000,000
Paid-In Capital in Excess of Par—Preferred Stock 560,000
Common Stock, $35 par (1,000,000 shares authorized, 400,000 shares issued) 14,000.000
Paid-In Capital in Excess of Par—Common Stock 1,200,000
Retained Earnings 180,000.000

At the annual stockholders' meeting on March 31, the board of directors presented a plan for modernizing and expanding plant operations at a cost of approximately $11,000,000.

The plan provided (a) that a building, valued at $3,375,000, and the land on which it is located, valued at $1,500,000, be acquired in accordance with preliminary negotiations by the issuance of 125,000 shares of common stock valued at $39 per share, (b) that 40,000 shares of the unissued preferred stock be issued through an underwriter, and (c) that the corporation borrow $4,000,000. The plan was approved by the stockholders and accomplished by the following transactions:

May 11. Issued 125,000 shares of common stock in exchange for land and a building, according to the plan.
20 Issued 40,000 shares of preferred stock, receiving $52 per share in cash.
31 Borrowed t4.000.000 from Laurel National, giving a 5% mortgage note.

Instructions

Journalize the entries to record the May transactions.

To determine

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.


Preferred stock:
The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred as preferred stock.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Issue of common stock for non cash assets or services: Corporations often issue common stock for the services received from attorneys or consultants as compensation, or for the purchase of non cash assets such as land, buildings, or equipment.

To Journalize: The entries to record the May month transactions.

Explanation

Journalize the issuance of the stock in exchange for land and a building on May 11.

Date Account Titles and Explanation Debit ($) Credit ($)
May 11 Land 3,375,000
Building 1,500,000
      Common Stock (125,000 shares ×$35) 4,375,000

      Paid-in Capital in Excess of Par value –

      Common stock (Balancing figure)

500,000
(To record issuance of 125,000 common shares in exchange of land and building)

Table (1)

Description:

  • Land and building is an asset account. Both are acquired upon stock issuance. Therefore, debit Land and building account with the value of its purchase.
  • Common Stock is a stockholders’ equity account and the amount is increased due to issuance of common stock. Therefore, credit Common Stock account with the value of common stock.
  • Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount is increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Par Value account with the excess value of land and building over the common stock value.

Record the issuance of preferred stock on May 20

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